BILL ANALYSIS C.S.H.B. 2924 By: Cook 03-30-95 Committee Report (Substituted) BACKGROUND Frequently, in divorce situations and in the probation of estates, one party, will seek to acquire the interest of the other or others in property which the acquiring person presently occupies as a homestead. In situations where the acquiring person must seek financing in order to acquire the interest of the other party, lenders will not loan funds only on the security of the interest of the conveying party, but are willing to provide funding on the security on the entirety of the interest in the property including that of the acquiring party. Should the lender have to foreclose on the property, if the security was only a partial interest in the property, the lender upon foreclosure would become a co-tenant with the very person to whom it loaned money. Consequently, financing under such circumstances is severely limited unless the lender can receive security on the entirety of the property being conveyed. Texas courts, most notably bankruptcy courts, have called into question the practice of taking a lien upon the entirety of the property including that of both the conveying and acquiring parties. This practice is known as "owelty of partition". The Texas Constitution, Article XVI, Section 50 protects the homestead from forced sale for the payment of all debts with certain exceptions, one of which is for the purchase money thereon. Nothing in the Texas Constitution prohibits the Legislature from defining the term "purchase money" so long as the definition constitutes reasonable interpretations of the Constitution and does not do violence to its plain meaning and intent. Another issue that requires addressing is the situation created under the Supremacy Clause of The United States Constitution where federal tax liens can be enforced against Texas homestead property pursuant to Section 6321 of the Internal Revenue Code. Recent court decisions have held that a third party lender cannot be subrogated to the rights of the Internal Revenue Service pursuant to such federal tax liens when the lender advanced funds to the tax debtor to pay off the tax lien taking as security the homestead property against which the lien applied. Under these circumstances, homestead property owners facing the loss of their homestead through foreclosure of the federal tax lien by the Internal Revenue Service cannot arrange for a third party loan secured by the homestead property to pay off the federal tax obligation and refinance the debt. PURPOSE The purpose of the Bill is to enable divorcing spouses and heirs (in probate situations) to obtain appropriate financing to resolve property disputes in divorce and to facilitate probate of estates, as the case may be. The Bill addresses the definition of "purchase money" to enable Texas courts to apply an owelty of partition lien to the interest already owned by the borrower as well as the interest being acquired by the borrower and thus smooth out the transitions inevitable in divorces and deaths. Also, as proposed, the Bill would allow a valid lien to be imposed upon homestead property when refinancing an existing federal tax lien by defining "taxes" to include federal tax liens and by including such liens in the definition of encumbrances in the Texas Property Code. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency, or institution. SECTION BY SECTION ANALYSIS SECTION 1: Amends Section 41.001(b) Texas Property Code to define "purchase money" to include consideration for an owelty of partition imposed against the entirety of the property by court order or written agreement. Defines taxes on homestead property to include ad valorem property taxes and federal taxes and refinances by third parties of ad valorem taxes or federal tax liens. SECTION 2: Effective Date: September 1, 1995 SECTION 3: Emergency clause. COMPARISON OF ORIGINAL TO SUBSTITUTE The Bill as proposed would have clarified the definition of rural homestead by defining it as being located outside of an incorporated city. The substitute deletes this language (SECTION 2 of the original bill). SUMMARY OF COMMITTEE ACTION The committee considered HB 2924 in a public hearing on April 3, 1995. The committee considered a complete committee substitute for the bill. The committee considered an amendment to the substitute which was adopted without objection. The following people testified in favor of the bill: Rep. Cook; and John F. Rothermel III. The motion to adopt the committee substitute as amended and report the bill favorably as substituted, with the recommendation that it do pass and be printed, prevailed by the following record vote: 9 Ayes, 0 Nays, 0 PNV, 0 Absent. The Chair instructed the Clerk to incorporate the amendment into the substitute.